2017 Iowa State University Land Value Survey

January 4, 2018

The survey was initiated in 1941 and is sponsored annually by Iowa State University. Only the state average and the district averages are based directly on ISU survey data. County estimates are derived using a procedure that combines ISU survey results with data from the US Census of Agriculture. Since 2014, the survey has been conducted by the Center for Agricultural and Rural Development in the Department of Economics at Iowa State University and Iowa State University Extension and Outreach.

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LAND?VALUE?SURVEY- Iowa State University Extension annually conducts a survey regarding land values throughout the state of Iowa. The graph above breaks down the average land values by county.

The survey is intended to provide information on general land value trends, geographical land price relationships, and factors influencing the Iowa land market. The survey is not intended to provide a direct estimate for any particular piece of property.

The survey is an expert opinion survey based on reports by licensed real estate brokers, farm managers, appraisers, agricultural lenders, county assessors, and selected individuals considered to be knowledgeable of land market conditions. Respondents were asked to report for

more than one county if they were knowledgeable about the land markets. The 2017 survey is based on 877 usable county-level land values estimates provided by 710 agricultural professionals.

Analysis by State

The 2017 state average for all quality of land was estimated to be $7,326 per acre as of November 2017.

The state value increased $143 per acre from November 2016.

The percentage increase was 2.0 percent from November 2016, which was the first increase after three consecutive years of decline.

Analysis by Counties

The highest value was estimated for Scott County, $10,497 per acre.

The lowest value was in Decatur County, $3,480 per acre.

Only four of 99 counties in Iowa reported a drop in land value.

Interpretation of the Survey Results

The 2017 Iowa State University land value survey reported a 2.0 percent increase to $7,326 in average Iowa farmland values from November 2016 to November 2017. This represents the first, albeit modest, increase in the Iowa farmland market after three consecutive years of decline from 2013 to 2016; however, this does not necessarily indicate a turn of the land market. Actually, the inflation-adjusted average farmland value actually saw a 0.2 percent drop since a year ago. Given

rising interest rates and stagnant farm income, the continued decline in values in the foreseeable future is still likely. This could be just a temporary break in a downward adjustment trajectory.

This recent increase is largely driven by limited land supply: only 20 percent of respondents reported more sale activities in their primary county, and this marks the first time in the past 20 years that more respondents reported four years in a row of less sale activities than in each previous year. Specifically, 43 percent of survey respondents reported lower sales in 2017 relative to 2016, compared to 20 percent reporting more sales, and 37 percent reporting similar/no change in sales. In addition to limited land supply, favorable interest rates and strong crop yields were reported across the state, except for South Central and Southeast Iowa.

The 2017 ISU survey shows that seven of nine crop reporting districts reported an increase in land values: the largest percentage increase was in East Central Iowa, 3.8 percent, which likely is a result of stronger yields this year-the East Central and Northeast districts are the only two districts that saw an increase in corn yields over 2016 levels. In contrast, the South Central district reported a loss, 1.6 percent lower than 2016, which could in part result from a 5 percent lower payment rate from the Conservation Reserve Program (CRP) from a year ago. The Southwest district reported no notable

changes in value. Additionally, only four of 99 counties in Iowa reported a drop in land value- Fremont, Mills, Montgomery, and Page Counties all saw a 0.3 percent decline.

This year's survey revealed different patterns in land values across different land quality classes.While state average values for high- and medium-quality land both increased about 2 percent, there was only a 0.5 percent increase for low-quality farmland values. In addition, low-quality land in the Central, Southwest, Southeast, and South Central districts all saw a decline compared to a year ago, ranging from 0.4 percent to 6.1 percent. This, in part, results from a lower CRP rental rate for those lower-quality land parcels eligible for CRP in 82 out of 99 Iowa counties compared to a year ago.

Outlook for Land

Values

After three consecutive declines since its 2013 peak, the average land value for all qualities of farmland saw its first increase. The estimated $7,326 per acre statewide average for all qualities of land represents a 2.0 percent increase from November 2016. To many, this recent 2.0 percent indicates a turnaround of the farmland market-58 percent of the respondents to the 2017 ISU survey expected another hike in their counties' land value a year from now. However, as opposed to a result of improving farm income, this recent increase in land market is mainly driven by limited land supply. Given the rising interest rate and heightening farm financial stress across the Midwest, this recent bump could likely be just a temporary break in a continued downward adjustment in the farmland market.

Many supply and demand factors were behind this recent increase in the land market. First, the farmland market has always been a thin market with less farmland sales, but the past four years the farmland market has been extremely tight: for four consecutive years, more respondents to the ISU survey reported less sales in their county compared to the previous year. In this year's survey, only 20 percent of the respondents reported more sales activities, while 44 and 37 percent reported less or similar sales activity, respectively. The limited farmland supply helped buoy market prices in

many areas across the state. Second, the U.S. Department of Agriculture Economic Research Service forecasted that U.S. farm sector profits are relatively stable in 2017 after 3 consecutive years of decline: U.S. net farm income is forecast to increase $1.7 billion (2.7 percent) from 2016 to $63.2 billion in 2017 and net cash income is forecast to increase $3.7 billion (3.9 percent) to $96.9 billion. Third, the 2017 Iowa State University Cost of Production estimates revealed that the estimated average cost for corn production in Iowa dipped by 12 percent to $3.51/bushel for corn following soybean production, and the average cost for soybean dropped by 9 percent to $9.56 for herbicide resistant soybeans. Despite continued declines in commodity prices, the corresponding drop in production costs have resulted in breakeven or positive production margin for many producers this year, which has a positive impact on farm income and asset values.

The 2.0 percent increase boosted confidence of our respondents in the perceived strength of the farmland market despite growing farm financial stress, especially in the medium term. Fifty-eight percent of the respondents to our 2017 ISU survey forecasted an increase in their local land market a year later, while 25 percent expected a lower land value, and 18 percent forecasted no change a year later. Looking at the land market five years from now, a vast majority of respondents (83 percent) expect a higher land value than current levels, with only 13 percent forecasting a decline. This is consistent with their corn and soybean price forecast, which is a slow but steady improvement in the cash crop markets, both corn and soybean. The farm managers and rural appraisers at the May 2017 90th annual Soil Management and Land Valuation conference also expected a stabilization in Iowa's farmland market in late 2017 throughout 2018, but it may rebound a bit in the medium run before 2020.

Put simply, land value is the net present value of all discounted future income flows. With certain assumptions imposed, one could think of land value being net income divided by interest (discount) rate. To understand the changes in land value over time and across space, it is useful to examine how net income and interest rates will change over the next few years. In particular, trends in net income for a particular region will be reflected in the farmland market, which tends to be localized.

With the boost of strong yields, the prospect for the agricultural economy is showing signs of stabilization after four consecutive years of declines. USDA Economic Research Service forecasted in August 2017 that U.S. net farm income will rise 2.7 percent in 2017. However, the USDA Office of Chief Economist long-term forecast to 2026 expected a slow improvement in farm income as opposed to a sudden rebound. In other words, in the immediate future, we are likely to see stagnation in the net farm income and farm sector profits, which is prone to shocks of NAFTA renegotiations and implies a stagnant land market in the near future.

With stagnant future farm income and a highly probable increase in interest rates, we might see farmland values continue to recede due to stagnant commodity prices, new uncertainty regarding agricultural trade such as NAFTA renegotiations, and possible stress sales from some producers.

Despite the recent increase driven by limited land supply, the economic fundamentals suggest that the Iowa farmland market appears to have peaked for the foreseeable future, and we may expect to see it drifting sideways. In other words, it seems that current farmland market hasn't fully capitalized the reduction of net farm income off its 2013 peak yet.

Across the Midwest, there are signs of deteriorating agricultural credit conditions and a continued, prolonged downturn in the agricultural economy, although with a much slower pace. Given the rising interest rates and stagnant farm income, I would not be surprised to see a continued decline in values in the future. This recent bump of Iowa farmland market, to me, seems more like a temporary break in a downward adjustment trajectory.